SMEs routinely face financing challenges. For starters, all small and medium enterprises are dealing with supply chains, customers, and greater society on a daily basis. Cash flow is needed to grease the wheels of operations, and a mix of fixed and variable expenses.
No SME wants to take on an unreasonable level of debt. However, there is a fine line that needs to be struck between applying for short-term business financing, and adopting a debt-averse approach to operations.
If a small business decides to take on debt without any plan to repay it, this is problematic.
Bank and non-bank entities alike actively promote debt-fuelled financing of SME operations.
They do this because of the revenues generated from the high-interest repayments on debt. A financial advisor from Small Business Loans Australia recommends that all SMEs evaluate their options before applying for a line of credit from a traditional bank lender. For starters, banks are notorious for making it difficult for businesses to pass the regulatory litmus test. Mounds of paperwork are required to satisfy banks of your creditworthiness. While this is good for banks, it is not necessarily an effective way for a fledgling business to get the financing necessary for its daily operations.
How to Tell if Short-Term Financing is Needed for Your Business?
Long-term debt and short-term financing are worlds apart. For starters, long-term debt includes things like lease obligations and contracts, post retirement benefits, individual notes payable, treasury bonds etc.
These liabilities have a lifespan of 1 year or more.
By contrast, short-term debt a.k.a. short-term liabilities has a lifespan of less than 1 year.
Examples of short-term liabilities include accounts payable, income taxes payable, short-term bank loans/non-bank loans, and lease payments.
SMEs need to fully understand the implications of debt on the strategic timeline before racking up any additional liabilities.
As a rule, a company’s assets should always exceed its liabilities. That way it can always meet its financial obligations.
However, if a company owes more money than it has, or can convert into cash, it is underwater. At that point, it will become difficult for that company to continue operating as its creditworthiness may take a hit.
Do Small and Medium Businesses Need Short-Term Financing?
Yes. Short-term financing is always needed for day-to-day operations, unexpected shortfalls, or opportunities that may arise in the markets.
Not every business has a huge capital cushion to fall back on when things go awry, or when a sudden change in direction is needed.
The beauty of short-term financing is that these lines of credit are typically less, and the time frame for repayment is also less than 1 year. There are many other benefits to short-term financing, notably the easier qualification criteria (less paperwork to supply, less hoops to jump through, and less hassle).
Businesses routinely endure challenges.
For example, small businesses may find themselves in a situation where they need to acquire another business. In such situations, it may not be smart to apply through banks for loans, since the process is so time and document intensive. Banks prefer clients with whom they have established relationships. Even so, the approval process and money transfer may only take place after a significant period of time.
With non-bank lenders, short-term financing can be available in as little as 24 hours – 48 hours.
In any event, it’s important to use a lender that is fully approved to offer credit to SMEs.
The bigger these companies are, the more credibility they have for small and medium enterprises.
Clients can typically expect rapid escalations of queries, quick customer service turnaround times and loans for a wide range of business purposes – recruitment, vehicles, inventory, machinery etc.
Typical short-term financing can range from $5,000 – $250,000, and unsecured lending is available through these non-bank lenders. Of course, certain requirements need to be met such as minimum turnover requirements from certain lenders. For the most part, clients with bad credit will also be considered for loans, typically at a higher interest rate.